Taubman Centers' CEO Discusses Q3 2012 Results - Earnings Call Transcript

Oct.25.12 | About: Taubman Centers, (TCO)

Taubman Centers, Inc. (NYSE:TCO)

Q3 2012 Earnings Call

October 25, 2012 10:00 AM ET

Executives

Barbara Baker – VP, IR

Bobby Taubman – Chairman, President and CEO

Lisa Payne – VP and CFO

Analysts

Michael Mueller – JP Morgan

Craig Schmidt – Bank of America

Todd Thomas – KeyBanc Capital Markets

Samit Parikh – ISI

Alex Goldfarb – Sandler O’Neill

Quentin Velleley – Citigroup

Andrew Rosivach – Goldman Sachs

Cedrik Lachance – Green Street Advisors

Ben Yang – Evercore Partners

Tayo Okusanya – Jefferies

Vincent Chao – Deutsche Bank

Operator

Thank you for holding and welcome to the Taubman Centers’ Third Quarter 2012 Earnings Conference Call. The call will begin with prepared remarks and then we will open the line to questions. On the call today will be Robert Taubman, Taubman Centers’ Chairman, President and Chief Executive Officer; Lisa Payne, Vice Chairman and Chief Financial Officer; and Barbara Baker, Vice President of Investor Relations.

Now I will turn the call over to Barbara for opening remarks.

Barbara Baker

Thank you, operator, and welcome, everyone, to our third quarter conference call. Yesterday, we released our third quarter results and our supplemental earnings information package. Both are available on our website www.taubman.com. As you know, during this conference call, we’ll be making forward-looking statements within the meaning of the Federal Securities Laws. These statements reflect our current views with respect to future events and financial performance although actual results may differ materially. Please see our SEC filings including our latest 10-K and subsequent reports for a discussion of the various risks and uncertainties underlying our forward-looking statements.

During this call, we’ll also discuss non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the comparable GAAP financial measures are included in our earnings release and in our supplemental information. In addition, a replay of the call is provided through a link on the Investor Relations section of our website. When we get to questions, we ask that you limit them to two and then if you have more, queue up again. That way, everyone has the opportunity to ask a question.

Now let me turn the call over to Bobby.

Bobby Taubman

Thanks, Barbara, and good morning, everyone. We’re pleased to announce another great quarter. NOI, up 7.4%, bringing year-to-date growth to 8.3%. Trailing 12-month sales per square foot, $681, another record for the company and up 10.7% from last year. FFO, occupancy, leased space, rents, all of our key operating statistics were up in the quarter. In addition, we recently held three groundbreakings, in Chesterfield, Sarasota and San Juan, and our first Asia projects are now underway. It was a very busy and very successful quarter.

So, let’s start with our growth in NOI. As I mentioned, comp center NOI, excluding lease cancellation income, was up 7.4% for the quarter. NOI growth was a result of increased rents including percentage rent and recoveries. Rents and recoveries benefited from higher occupancy in our centers. Percentage rent increased due to our ongoing growth in tenant sales. This is all flowing from nearly three years of great sales. The metrics are clearly strong. We now expect NOI growth of about 6% for the year, that’s up from our previous guidance range of 5% to 6%. As you recall, we’ve said that we expect volatility of net recoveries to reduce comparable NOI growth in the fourth quarter.

We’re pleased with our sales per square foot growth of 6.2% for the quarter. Although sales growth has moderated a bit, this is a strong number. It’s well ahead of any inflation and it comes up against much tougher comps. Remember, we saw nine straight quarters of double-digit increases between 2010 and early 2012. As we’ve said, we didn’t believe sales momentum would fall off a cliff, but would moderate and slowly normalize. That’s exactly what we’re seeing.

This quarter, we saw sales per square foot growth in nearly every one of our 23 merchandise categories. Shoes, beauty and home furnishings were especially strong. Unisex apparel, our largest category, also had a superb quarter. Luxury brands like Cartier, Bulgari, Christian Dior, and Louis Vuitton, were all up double digits. J.Jill and Talbots in Women’s apparel. H&M and American Eagle in Unisex, and Restoration Hardware and Z Gallerie all delivered very solid increases. Zales and Foot Locker had excellent quarters as well.

On September 30th, occupancy at comp centers was 90.4%, up 190 basis points compared to a year ago. And the total occupied space at comp centers, including temporary tenants, increased to 94.7% at September 30th, up 160 basis points from 2011. We continue to believe that occupancy will end the year up as much as 150 basis points.

Leased space in comp centers was 92.4%, up 1% from last year. This clearly reflects the positive retailer sentiment in our centers. Remember, leased space includes spaces where leases had been signed, but the tenant is not yet open. This statistic does not include temporary tenants. We’re converting the positive tenant sales environment into increased average and opening rents. Average rent per square foot of $46.85 was up a solid 3.5% from last year. Year-to-date, average rent was up 2.8%, on track with our guidance of 3% for the year.

Trailing 12-month rent per square foot releasing spreads are a strong 19% through September 30th.

As we said in the earnings release, our developments are now making visible progress. First Chesterfield, our outlet center in suburban St. Louis. As you know, we have all of our approvals to build, and we are. The site’s fully graded, all the underground is in, and walls are already up on nearly half the buildings. You can track the construction at www.taubmanprestigeoutletschesterfield.com. We have accelerated our opening to August 2, 2013, nine months from now, to take advantage of Missouri back-to-school tax-free holiday weekend.

Retailer interest is extremely high. There’s wide recognition that the market is superb and that our site is vastly superior. Remember, this will be the first outlet center in the 18th largest market in America. Nonetheless, competitive activities exist, and as they continue, we believe the risk to our returns could be about 100 basis points.

In Puerto Rico, we hosted a formal groundbreaking in September for the Mall of San Juan. Site work has begun and we are currently targeting a late 2014 opening. We expect to announce the exact opening date in the next few months. In Sarasota, we just held University Town Center’s groundbreaking. Site work is underway and utilities and grading will commence within the next month. We’re just two years away from the scheduled opening on October 16, 2014.

Both the Mall of San Juan and University Town Center are expected to generate sales productivity that place them in the top half of our portfolio. This is quite a statement when you think at yearend, our portfolio will likely average nearly $700 a square foot, a rare number for regional malls in America. We believe that only 6% to 7% of the roughly 1,000 centers in the United States are at this level. Not surprisingly, leasing for both centers which begin at the May ICSC is progressing extremely well.

In Asia, we are growing our business with a systematic approach. First, we demonstrated our skills and ability to add value at IFC Mall in Seoul, South Korea. This is part of a 5.4 million square-foot mixed use project, including three Class A office towers, a Conrad International Hotel and 430,000 square feet of retail space. We are not an investor in this project; we are the leasing agents and ongoing manager to the retail center. This center opened very successfully on August 30th, 100% leased with over 100 stores. It is a great design with a terrific retail mix.

At IFC, we introduced our lease form and established the concept of minimum rent to the retail market in Korea. These are just two of many value-added business practices we brought to the project. We expect to build upon this success in other projects.

We’re moving forward on the joint venture with the Shinsegae Group to build a 1.7 million square-foot center, Hanam Union Square. Our total investment, including capitalized interest, is expected to be about $330 million, representing a 30% interest in the shopping center. We are considering bringing in a financial partner for as much as 50% of our share. We’re targeting a 7% to 7.5% initial return with strong growth. Hanam Union Square is expected to open in 2015.

So, why South Korea? Korea offers an advanced economy with sophisticated customers and high levels of consumption that are a significant part of its growing GDP. However, to fully understand our opportunity, you need to understand three aspects of South Korea’s retail market.

First, retail was only fully liberalized in 1996, allowing international retailers to compete equally with Korean nationals. As a result, Korea has long been dominated by powerful department stores and street retail. The regional mall, as we know it, is really just emerging. In our view, IFC is truly the first well-planned mall in the country.

Second, the country is mountainous, with a limited supply of buildable land. International retailers entering the market had difficulty finding good spaces in great locations and creating critical mass in co-tenancy with other brands. With limited options, they typically had to locate in department stores, but always with the trade-off of losing substantial control over their brands.

Third, customer behavior is deeply influenced by Korea’s unique loyalty programs linked to the powerful family chaebols, business conglomerates consisting of multiple enterprises. These chaebols operate in a broad array of retail, department stores, hypermarkets, food, restaurants, auto, gasoline. Thus, the loyalty programs allow for purchases across all these product lines. That strengthens allegiance to a single chaebol. Such loyalty programs are something a standalone retailer can’t offer on their own.

These three points make Hanam Union Square easy to understand. The center will be located on a large, clean plot of land, with excellent access. We’re partnering with Shinsegae, part of the Samsung Group, opening up the opportunity for a loyalty program throughout the mall. And we plan to build the largest true western-style mall in Korea with in-line flagships from international brands, including substantial luxury, many of which will be the largest of their chains in Korea.

Finally, for a developed market, Korea is underserved in retail space. Its overall supply of retail per capita is less than 10% of what it is in the United States.

In China, we’re very pleased to have now announced our first retail development, partnering with Wangfujing Department Store on a shopping center in Xi’an. Our role thus far has primarily been in the programming and planning of the center. Going forward, we will be leading the leasing effort.

It’s located in the second-tier city in Central China, with nearly 9 million people, consistently high GDP growth, and continuing to grow very quickly. Our site is located in the fastest-growing district of the city. This center will be part of a large mixed-use project of almost 6 million square feet. We will be investing in the retail portion only, which will be over 1 million square feet with over half of that in mall specialty stores. We expect to open this project in the third quarter of 2015.

Our share of the investment will be somewhat over $100 million for a 30% equity interest in the retail portion of the project. We’re expecting a 6% to 6.5% unlevered after-tax return at stabilization. Sales growth rates are expected to be in excess of 10%. Combined with shorter lease terms than the U.S., returns on our investment are expected to equal those earned in the U.S. by the seventh or eighth year. We expect they will continue to grow at a rapid pace beyond that.

As we said last quarter, we expect to announce a similar project in another second-tier city in Central China, again with nearly 9 million people and growing very quickly.

In Asia, we now have a platform and good strategic partners. However, we believe it’s important to walk before we run. We’re very focused on execution. We’re not the lead in these initial projects; however, we always make sure that we have control over design and leasing. This is a marathon, it is not a sprint.

So now, I’d like to turn the call over to Lisa, then I’ll return at the end of the call with a discussion of our guidance and closing comments. Lisa?

Lisa Payne

Thanks, Bobby. This quarter, our FFO per share was $0.79, up more than 25% from the third quarter 2011 FFO per share of $0.63. Included in these results are $0.07 from charges related to the redemption of the Series G and age-preferred stock in the third quarter 2012 and $0.02 of acquisition costs for the third quarter 2011. Excluding these items, our adjusted FFO for the quarter was $0.86, 32% better than the third quarter adjusted FFO of $0.65 last year.

Now let’s look at the year-over-year variances for the quarter as outlined on Page 10 of the supplemental. First, minimum rent, up $0.075 from the prior year, primarily from higher occupancy and rent per square foot. Next, percentage rent, up $0.015 from increased sales. Net recoveries, up $0.03, a result of higher occupancy.

As we’ve said, recoveries will be volatile due to the mismatch between fixed CAM revenues and CAM expenses. Although net recoveries were positive this quarter, lower margins are expected in the fourth quarter and net recoveries are expected to be down. That’s precisely why we’re anticipating our NOI growth to moderate.

Net revenue from management, leasing and development services, favorable by $0.03, primarily due to a leasing success fee related to the opening of IFC Mall in Seoul. General and administrative expense was unfavorable by $0.02 due to increased compensation and professional fees. As we’ve stated last quarter, our quarterly average run rate for G&A is now just over $9 million.

Next, non-comparable centers, favorable by $0.03. This primarily represents the very strong performance of City Creek Center which opened in March. Operations of The Pier Shops and Regency Square, favorable by $0.075 because we no longer own them. These centers were disposed of in the fourth quarter of 2011, which means we’ll have this variance for just one more quarter. Finally, dilution from the company’s recent common and preferred equity offerings net of the interest expense reduction impacted our results unfavorably by $0.01.

As you know, we currently provide management and leasing services at Woodfield Mall in Schaumburg, Illinois. It’s been widely reported in the media that General Motors Pension Trusts decided to market its 50% interest in that mall and that CalPERS exercised its rights to acquire it. As part of CalPERS purchase, it has also been reported that they have been in discussions with owner/operators to acquire an interest and manage the center. If these reports prove accurate and we are no longer involved in the leasing and management of the shopping center, the full-year impact will be in the range of $0.03 to $0.04 per share. However, there would be no impact until 2013.

Now, moving to our balance sheet, we’ve had a very busy quarter. In August, we completed a common stock offering with net proceeds of $209 million. We wish to thank those of you who participated. Our share base has increased by 2.9 million shares.

Also in August, we completed $192.5 million preferred stock offering. The proceeds from the new Series J preferred stock were used to redeem our previously outstanding Series G and H. The Series J with a coupon of 6.5% will provide significant future savings versus the Series G and H which had a weighted average rate of 7.8%.

Also in August, we completed the refinancing of Sunvalley, our 50% owned unconsolidated joint venture in Concord, California. The new $190 million loan matures in 10 years and bears interest at an all-in fixed rate of 4.47%. This represents a 123-basis-point reduction in the stated rate from the previous loan. Our share of excess proceeds of about $30 million after reserves was used to pay down the company’s revolving credit facilities. We expect to complete the refinancing of the loan on the land at Sunvalley in the fourth quarter.

As a result of these transactions, our ratio of debt to total market capitalization stood at 30.5% at the end of the quarter, an all-time low for the company. Subsequent to quarter-end, we completed a 12-year $350 million mortgage financing on the Mall at Millenia in Orlando, Florida. Millenia is a 50% owned unconsolidated joint venture. The new loan bears interest at an all-in fixed rate of 4.05%, a 146-basis-point reduction in the stated rate from the previous loan. Our share of net excess proceeds totaled $75 million and was used to pay down the company’s revolving credit facilities. A $1.6 million early refinancing charge at our share will be recognized in the fourth quarter.

With our 2012 financing plan complete, we have now turned our attention to 2013. We are currently reviewing term sheets for the refinancing of Great Lakes Crossing Outlets. We expect to refinance the loan in the first quarter of 2013 at a rate below 4%, with approximately $100 million of excess proceeds. This is a tribute to the center’s rebranding to an outlet mall in 2010.

And with that, I’ll turn the call back to Bobby.

Bobby Taubman

Thanks, Lisa. For the full year 2012, we are increasing FFO guidance by $0.05 to a range of $3.18 to $3.23. This includes the $0.07 charge related to the redemption of Series G and H preferred stock and a $0.02 charge for the defeasance cost related to the refinancing of the loan on the Mall at Millenia. Excluding these charges, adjusted FFO would be in the range of $3.27 to $3.32, again a $0.05 increase at both the low and the high. This new guidance is primarily the result of the increase in comp center NOI to about 6% for the year. In addition, we now expect our share of predevelopment expenses to be about $19 million. That’s down from our previous estimate of $21 million.

So, in summary, we had another great quarter. We’re seeing consistent core growth. We’ve continued to improve our already strong balance sheet and we’ve made significant progress on the development front in both the U.S. and in Asia.

Before we get to questions, I have one more comment. In less than a month, on November 20th, we will have been a REIT for 20 years. As we approach this anniversary, I’m very pleased to say that as of the end of September, our company’s total shareholder return for both the 10- and 15-year periods was number one among all U.S. REITs operating during those periods. We’ve also done very well on our one, three and five-year bases. We’re proud of this consistent performance. And we’d like to thank the many employees and shareholders who have supported us over now these 20 years.

So now we’d like to open it up for questions. As Barbara said, let’s try to limit the questions to two please. Sarah, are you there?

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Michael Mueller from JP Morgan. Your line is open.

Michael Mueller – JP Morgan

Couple questions. First of all, in terms of the mix of developments between call it the U.S. and in Asia, looks like the current pipeline is about 45% skewed toward Asia. I know you talked about maybe selling an interest there, but you also mentioned adding another property to the projects. So I guess, over the next few years, if we think about that pipeline, is the mix of Asia to U.S. projects going to be as high as it is now, or do you see that lowering, going lower?

Bobby Taubman

Well, I think our number one – I think our number one focus, Mike, really is on execution. We’ve got a lot of projects going on right now. We do have a number of projects in the pipeline both in the U.S. and in Asia. Which of those projects emerge? You just never know. At the end of the day, I would guess that as you look out over the next five to 10 years, we will end up with more capital investment in Asia than in the U.S.

Michael Mueller – JP Morgan

Okay. And second question, you talked about the potential for returns being a little bit lower at Chesterfield. Are you seeing that now or is that just something to keep in mind over the next few quarters if it materializes? And would it be a function more of just lower occupancy expectation or rent pressure?

Bobby Taubman

Well, obviously, if two projects are built that’s going to fragment the market, it will reduce sales productivity, which would modestly impact the returns. But the returns would still be attractive. St. Louis is a terrific market; it’s the 18th largest market, as I said, in the country. When you look at the top 40 markets and you look at the key tenants, it’s the only market in the top 40 with most of the key tenants where they all have at least one, if not two, if not three, outlet centers. So this is a terrific market. Our project is moving forward very quickly.

As we said, we accelerated our date to August the 2nd, the walls are going up. I encourage you all to check out the website. I encourage you to go see it, that’s even better, because it’s sitting there for over half a mile on the freeway. It really is an amazing, amazing site. But if competition activities do move forward, then there is risk to our returns.

Michael Mueller – JP Morgan

Okay. Great. Thank you.

Bobby Taubman

Thank you, Mike.

Operator

Your next question comes from the line of Craig Schmidt from Bank of America. Your line is open.

Craig Schmidt – Bank of America

Thank you. I was just wondering, how is the search for a replacement for Senior Vice President of Leasing? I know Billy is stepping in, but given the pace of development, I’m sure he’s stretched a little these days.

Bobby Taubman

Good morning, Craig. Well, first of all, Billy is loving what he’s doing. I mean he’s handling it like Spiderman. He’s really enjoying it. That’s number one. But because that’s the fact and because he is so capable in that role, we have no need to push, we’ll be very patient here. We’re going to take our time. It’s a very important position. And when we fill it, we’re going to feel very confident about the person that we put in that role. And I would say that the evidence that the transition has gone extremely well is that leasing remains extremely strong. And it’s a very good environment for us, but our results suggest that we’re doing very well.

Lisa Payne

Yeah, I would add, we had hired a management – I mean, executive search firm to begin the search. So we are – we have initiated a search and we’re in the process.

Craig Schmidt – Bank of America

Okay, good for that. And just following up on that, there is, it seemed to be some disconnect between just some of the macro concerns and the pace of retail performance. If we assume that holiday ‘12 is at or near the sales year to date, what does that suggest for leasing in 2013?

Bobby Taubman

Well, what we’ve said is that sales are likely to moderate. At 6.2%, it’s still fantastic. Most of the sales for the holiday that are out there, most of the sales projections out there are around 3%, 4% plus, NRF I think is at 4.1%. So that’s very consistent with what we’ve said now for a long time, eventually they would normalize sales. Sales of 3%, 4% are terrific, especially in an environment of less than 2% inflation.

So I think you have a very positive retail environment for our quality of shopping centers, and I think retailers are going to continue to want to be in those centers. So I – all the metrics you think, say, lease space, occupancy, temporary tenant space, all this stuff is very strong. And we are sitting today; I mean we project to be about 13% total occupancy costs at the end of the year for the trailing 12 months. That’s a very positive signal that would suggest that we will continue to see growth in rents for some period of time.

Craig Schmidt – Bank of America

Okay. Thank you.

Operator

Your next question comes from the line of Todd Thomas from KeyBanc Capital Markets. Your line is open.

Todd Thomas – KeyBanc Capital Markets

Hi. Good morning. Thank you. Just back to St. Louis, I was just wondering, can you give us some details on what the phased delivery might look like there in terms of cost? And then also how we should think about the yield for the two phases individually?

Bobby Taubman

We haven’t disclosed the individual costs or the individual returns. We tend to look at the project in total, because our expectation is that we’re going to build 450,000 feet, that’s how it’s planned. We’re just, in order to get a piece of it opened August the 2nd, we decided we’re going to build 310,000 square feet. So we have 140,000 square feet that will open in the second phase. And when exactly that timing is, isn’t clear, but it’s likely to be soon after the first phase opens.

Todd Thomas – KeyBanc Capital Markets

Okay. And then in Asia, the two deals announced, can you just talk about how those deals work in terms of the economics from an investment and cash flow distribution perspective? You go in with a 30% interest, maybe bring in a financial partner for half of that. But will there be any promotes available to any of the parties in the joint venture? And what will the leasing and management fees look like for Taubman?

Bobby Taubman

Well, we don’t disclose individual leasing and management fees. If we do bring in a partner on Hanam, which we suggested, there would likely be some promotes because it would be a traditional institutional investor that we would consider. Most often in Asia, the fee structure, and I’m not going to get into individual fee, what the numbers are, but most projects are joint project management where the joint ventures create a project team that then leases, manages and markets the project.

As we said in Xi’an, we are actually taking the lead in being responsible for the leasing. We will have a joint management and joint marketing which would be probably a very good decision given that we don’t live in China. So we want the benefit of somebody like Wangfujing that has tremendous on-the-ground understanding being one of the largest department stores in China. You would also want the local knowledge that would come, in this case, with the Fumi company that is the local real estate guy, that’s a very significant company in that market. So it’s set up as a joint venture management team.

Lisa Payne

Yeah, I would just add, as you think about Asia in your modeling, we wouldn’t assume to model significant fees. That’s not why we’re there. We’re really there for value creation. And as Bobby said, because of the joint nature of management and leasing, our goal will be to get our costs at least covered, and maybe over time, as we do here in our expertise fields, we’ll be able to generate fees from our JV partners, but not initially.

Todd Thomas – KeyBanc Capital Markets

Okay. Thank you.

Operator

Your next question comes from the line of Samit Parikh from ISI. Your line is open.

Samit Parikh – ISI

Hi. Good morning, everyone. My question had to do with your gross tenant sales figure for 3Q versus 2Q. I know, Bobby, you said that the sales numbers continue to look pretty strong on a year-over-year basis. But I guess when you look at the gross number for 3Q versus 2Q, your tenant sales were flat to a little, very, very minimally down, and I think the last time we saw that was in 2008. Did you see any concern (inaudible) consumer from 2Q to 3Q that may be showing that maybe your consumer is being a little bit more hesitant on a sequential basis, not so much year-over-year?

Bobby Taubman

No, I mean, I haven’t focused on those numbers, and we can look at them. I don’t know if it’s because what’s in and what’s out, whether The Pier or something else, something coming in or out actually affected those numbers. But, as I said in my comments, the – nearly – of the 23 Merchandise categories, nearly all of them, I think maybe one wasn’t up. So you’re talking about across the board, the geographies, different markets, different price points. I mean, we’re not seeing – this activity is widespread. It’s very good growth.

Samit Parikh – ISI

Okay. And then my second question, I know – something else was reported in the media besides Woodfield Mall. I guess Westfarms and the potential sale over there. Would Taubman be a likely buyer of that? Could you comment on maybe your interest in consolidating that asset if you have the chance?

Bobby Taubman

I’m not aware of any local media report and I’m certainly not aware of our partner, if that’s what you’re suggesting, interested in selling their interests in Westfarms. Is that what you’re saying?

Samit Parikh – ISI

Yeah. I thought I read that somewhere...

Bobby Taubman

I don’t believe that...

Lisa Payne

By the way, we’ve done a lot of buy-outs of our partners and if...

Bobby Taubman

Including at Westfarms.

Lisa Payne

Right. And if for some reason...

Samit Parikh – ISI

Oh, I’m sorry. I’m sorry. I meant Waterside, not Westfarms. Sorry, I didn’t pick that up.

Lisa Payne

Ah, that is true.

Samit Parikh – ISI

Okay.

Bobby Taubman

No, no, no, that is true. There is media reports that at Waterside, the institutional investor that owns 50% of the asset, Oregon PERS. The media reports are that they’re marketing their interest. And I can’t comment more to acknowledge that those media reports exist.

Samit Parikh – ISI

Okay. Thank you.

Operator

Your next question comes from the line of Alex Goldfarb from Sandler O’Neill. Your line is open.

Alex Goldfarb – Sandler O’Neill

Thank you, good morning. Going to the development, on the Asia development. When do we – when do you think that we’ll have final budget for the two properties. And in the footnote where it says on the second project somewhat over $100 million, how much, like, the variability is there in that somewhat over?

Bobby Taubman

Probably, as much at $115 million to $120 million.

Alex Goldfarb – Sandler O’Neill

You mean the total could be $115 million or $120 million, not an additional.

Bobby Taubman

No, no, no. Yeah, yeah. It could be an additional $15 million to $20 million.

Alex Goldfarb – Sandler O’Neill

Okay. When do you think the final budget would be out?

Bobby Taubman

Probably in the next quarter or the quarter after that, for certain.

Alex Goldfarb – Sandler O’Neill

Okay. And the second question is, the returns you spoke about in Korea – the 7% to 7.5% versus the 6% to 6.5% in China – what’s sort of the difference? Why the two – why is the yield difference for the two economies? You speak enthusiastically about both. Is there a different growth profile or is it the way the taxes work, or is there something that drives the different yields?

Bobby Taubman

It’s primarily – there are a number of things – but it’s primarily the growth profile. And the GDP in Korea has been generally in the range of 4%, 5%, 6% over a long period of years and is expected to continue in that level. The GDP growth in China, but especially in these markets that have been growing so rapidly, places like Xi’an and the other market that we’ve not yet identified yet, are growing at mid-teen and higher GDPs over many years, and the government initiatives in these markets are such that it’s expected to grow that way for many years, five, 10, 15, maybe even 20 years, it’s expected to continue to grow even off of increasingly higher bases.

So when you look at each market, you have to look at what’s happening on the ground in that location and we feel very confident that the Xi’an project will grow at least at the 10% level that we’ve been talking about.

Alex Goldfarb – Sandler O’Neill

Thank you.

Operator

Your next question comes from the line of Quentin Velleley from Citigroup. Your line is open.

Quentin Velleley – Citigroup

Hi. Good morning. Just going back to Chesterfield, I think in the most recent announcement, you had at least 40 out of the 80 shops in the first phase. Can you give us a sense of what co-tenancy clauses are in those leases? I’m just curious, given the competing project, and you’ve had some overlap where you’ve seen tenants signing both projects. I guess, how easy is it for tenants to exit one of those leases and go into the other development based on co-tenancy clauses.

Bobby Taubman

Well I think, in the outlet business, you don’t have the traditional anchor stores. The department stores that exist in a reasonable shopping center that are there, but then all the specialty stores know that they have the confidence that the promotion and branding of those department stores will bring the anchors.

So what has developed over the long history of the outlet center industry is that the key fashion brands that really drive the customer destination, those key brands all want to be near each other. And so that it is accurate to say that there are co-tenancy requirements in all the outlet centers that are being developed. And each tenant negotiates its own co-tenancy based on the tenants that are most important to it that they be there. And they’re very complex clauses. So it is correct to say that they are important clauses and they are being negotiated with a great deal of intensity.

Quentin Velleley – Citigroup

And then just secondly, I guess following up on that, Nike and Polo seem to be the two tenants that generally you would have thought would have signed up by now. And I know you don’t like to speak about individual tenants, but can you give us some kind of feel as to when you’re expecting them to make up their mind on what project they might go to?

Bobby Taubman

I can’t comment, Quentin, I’m sorry, on any individual tenant negotiations. Tenants often like to make their own announcements, and when we do make announcements, they’re timed for the best opportunity of that individual project. And that’s how we need to continue to do it on this project.

Quentin Velleley – Citigroup

Okay. Thank you.

Operator

Your next question comes from the line of Andrew Rosivach from Goldman Sachs. Your line is open.

Andrew Rosivach – Goldman Sachs

Good morning. I’ve got some napkin math that I was hoping maybe you could help me with. It looks like your guidance is implying that your fourth quarter is going to come in, in the high 90s, but you actually did $0.93 adjusted in the fourth quarter of ‘11. That’s a big decline in the year-over-year growth rate; it’s in the mid to high single digits. And I was just curious what could potentially be driving that in the quarter.

Lisa Payne

It’s all – well, first of all, there is some unknowns which is percentage rent, which we really have a hard time estimating. But the big variance in the fourth quarter as we’ve talked a lot about, are net recoveries. Last year was a very, that a decent fourth quarter that the expenses of – our expenses tend to be very back-ended, and in this year, it’s even more so. We actually, frankly, had a better third quarter in net recoveries than was expected, and so it’s even more pushed to the back half, as well as promo funds are spent generally – much more in the fourth quarter. So it is primarily due to recoveries.

Andrew Rosivach – Goldman Sachs

Thanks. And is any piece of it related to the management, leasing and development services line? And is there anything we can think about how that run rate is going to look like going through next year when you potentially won’t have things like success fees that have run through it in 2012?

Lisa Payne

We did have a success fee this quarter. I would expect next quarter because there won’t be such a onetime issue to not be – it’s hard to guess because it’s based on how much leasing you do for your third-party business, et cetera. Next year, we do still have our project in Korea still has more success fees to be reported. So, we would expect next year to probably be – we don’t know yet, but I wouldn’t say that off from this year right now because we still have a success fee to earn in Korea for next year.

Andrew Rosivach – Goldman Sachs

Great. Thank you very much.

Lisa Payne

I would mention one thing. It is all dependent, though, on what happens with Woodfield, as we did disclose and we wanted to be very clear in the release. If we don’t continue to manage, it will impact us $0.03 to $0.04 and some of it would be on that line item for next year.

Andrew Rosivach – Goldman Sachs

Is that – that’s just a straight $0.03 to $0.04 to FFO? There’s no offsetting expense?

Lisa Payne

That’s the net effect.

Andrew Rosivach – Goldman Sachs

Got it.

Lisa Payne

Of when you take all the fees versus how we allocate costs to that contract, the net impact is $0.03 to $0.04 to FFO.

Andrew Rosivach – Goldman Sachs

Great. Thank you.

Operator

And your next question comes from the line of Cedrik Lachance from Green Street Advisors. Your line is now open.

Cedrik Lachance – Green Street Advisors

Great. Thank you. Bobby, I’m just curious when I see now a few development projects in the U.S. and soon enough three in Asia, how many projects do you think Taubman can handle at the same time from a human resources perspective?

Bobby Taubman

Well, as I’ve said in the past on these calls, we spend an enormous amount of time focused on execution. We remember the lessons of 2001, and we’re a much larger company today, much bigger platform, more people, much better balance sheet. We have a staffing plan very clearly articulated both here as well as in Asia. The principal reason that we were interested in TCBL was its execution capability, our ability to instantly create a platform that would allow us to have confidence in the leasing and the construction efforts that we anticipate in these projects. So we spend a lot of time thinking about these questions, Cedrik, and we are confident that we will be able to deliver on the returns that we’ve discussed and on the schedules that we’ve been talking about.

Cedrik Lachance – Green Street Advisors

And in regards to JV interest, the one JV interest that’s on the market in your portfolio, and then just broadly, how do you think about the ability you may have to expand your ownership of some of the joint venture properties you have?

Bobby Taubman

Well, it’s been one of the ways that we’ve grown our company over the 20 years. As individual minority interests have become available, we have bought a number of them over the years, not all of them that have come for sale, but many of them that have come for sale.

When you have a marketplace that is searching for yield as much as this marketplace is, with interest rates near zero, it’s not surprising that good assets are coming out of the woodwork. And I think that anybody that owns a great asset has to be really thinking, when they have a minority position like this, they have to be thinking about, what do they want to do? So you’ve seen a number of interests come on to the market, including the Woodfield interest that GMPT put into the marketplace.

So, obviously, we’re going to look at each one of these assets, we’re going to look at the pricing, and we’re going to try to understand how we feel about the growth of the assets, and we will make our individual decision. In the case of Waterside and the media reports that OPERS is considering marketing its interest, we are – we, with the Forbes Company, are managing and leasing that project really regardless of what happens with respect to their interest. But we are very interested in that interest, if in fact the media reports are accurate.

Cedrik Lachance – Green Street Advisors

Right. Thank you.

Operator

Your next question comes from the line of Ben Yang from Evercore Partners. Your line is open.

Ben Yang – Evercore Partners

Good morning. Thanks. Just building a bit on Cedric’s question, I was wondering if you can comment on whether Woodfield is even an asset that you’d like to own or maybe own a piece of if CalPERS ends up selling? Because I think in the past, you talked about wanting to buy higher-quality portfolios, malls that do greater than the portfolio average? And I think this one is slightly below. Is it something that you’d want to own, and, hypothetically, how would you think you’d end up paying for an acquisition given the large price tag?

Bobby Taubman

Well, I think when we talked about the Davis Street acquisition, the key decision for us, and remember we paid a cap rate in the 4.5% range. So for us to pay that kind of cap rate, the key for us was the low occupancy costs that were present. So we felt that our programs, our specialty programs, our ability to lease and merchandise the asset, an asset that was doing, two assets that were doing $700 a square foot, their ability to be expanded, they were in growing and affluent markets, we felt that that was a true strategic acquisition where we could have tremendous added value to those assets.

Woodfield, we developed 41 years ago, and we had been leasing and managing that shopping center for all that period of time. Whatever magic we could bring to the asset, whatever growth we could create, we believe that we’ve done a very good job in that asset, and we as a owner through 1998, we’re the beneficiary of that. And then CalPERS and GMPT were later the beneficiary of it. So we feel we’ve done a really good job leasing and managing it, and that asset would not, you wouldn’t expect it to have the low occupancy cost that Davis Street had.

Ben Yang – Evercore Partners

So, it sounds like high occupancy costs, not much growth left and the fact that you guys have done an excellent job – can you comment on what the cap rate was on the piece that ended up selling? And maybe what that says about the value of your own portfolio perhaps?

Bobby Taubman

We can’t comment on any of that. There are a number of media reports on what the cap rate was if you’d like to look them up.

Ben Yang – Evercore Partners

Great. Thank you.

Operator

Your next question comes from the line of Tayo Okusanya from Jefferies. Your line is now open.

Tayo Okusanya – Jefferies

Hi. Yes. Good morning. Just a quick question in regards to the outlook on the outlet side. With all the competition going on, you guys in Chesterfield and new stuff going on in Charlotte between Simon and Tanger, just curious how you’re thinking about that space going forward, if you think you’re going to be doing more development. Or whether with what you’ve got right now, you’re kind of full – your hands are full with all the different things you’re doing domestically and internationally.

Bobby Taubman

Well, it’s clearly a very competitive space. And it’s been where a lot of development investment has been made by our peer group for some time, and more recently where almost all of the development activity has been. We have stated for the last couple of years that we believe it’s one of the four prongs of our growth profile, of our external growth. And we believe that over the next decade, we will be able to build a handful of these assets and that it will augment our growth very nicely to be able to do this.

It’s a business that we feel we understand well. It’s a business that we were encouraged to come into by our tenants, by our retailers. It diversifies our product type and we think it’s very synergistic with what we’re doing and really a natural extension of our capabilities. So we’re very committed to the space and we’re excited by our first one in St. Louis with Chesterfield.

Tayo Okusanya – Jefferies

Are there any other markets that kind of attract – that are very attractive to you like San Francisco or some other markets out there?

Bobby Taubman

There are many very attractive markets. One of the key companies in this sector has talked about there being maybe 100 more outlet opportunities in the United States. I don’t know if there are that many. And there certainly aren’t that many that we would want to build because we tend to want to build high-quality assets, regardless whether it’s the Mall side or the Outlet side. So we’re talking about building great assets that are equivalent to A-quality regional malls in their space, the Outlet space. And we’re going to be very selective in what we want to do.

Tayo Okusanya – Jefferies

Sounds good. Thank you very much.

Bobby Taubman

Thank you.

Operator

(Operator Instructions) And your next question comes from the line of Vincent Chow from Deutsche Bank. Your line is open.

Vincent Chao – Deutsche Bank

Hi, everyone. I was just wondering if you could just remind me here, in China and maybe to some degree in Korea, in terms of capturing the growth of those markets, is that – in terms of the lease structures – is that built into the contractual lease bumps or is it more shorter lease terms and then you capture the upside on the roll-over?

Bobby Taubman

Well it’s a combination, but it’s principally the shorter lease terms, especially in China, you’re looking at typically a three-year lease term, but three, five, seven on the outside. So the – and the principal reason that it’s been that way is that landlords recognize that the GDP growth is so strong that moves into sales and the sales, obviously as they move up, the tenants are then able to pay greater rent. So the shorter lease terms is very typical throughout Asia, but especially in China.

Vincent Chao – Deutsche Bank

Okay. And then, it sounds like, is percentage rent similarly booked in China as in the U.S.? Or is it just due to roll-over?

Bobby Taubman

There will be percentage rent, but remember, when you have a shorter lease term, what you’re doing is effectively converting the percentage rent into fixed minimum rent. That’s what we do here. We have shorter lease terms than the industry average and one of the principal reasons is that you want to control the space. If the tenant’s doing exceptionally well and paying a percentage rent, then you want them to remodel their store and position themselves as best as possible and watch their sales continue to grow. But the number one thing you’re doing is increasing your guaranteed minimum rent. And if they’re not doing well, you want that shorter lease term so you can get a better tenant in there that can pay you more rent.

Vincent Chao – Deutsche Bank

Okay. Thank you. That’s helpful.

Operator

And there are no further questions in queue.

Bobby Taubman

Sarah, thank you very much and we appreciate everybody joining us. We’re very proud that our sales have now grown to $681 a square foot, that we’ve increased our guidance, and that we’ve got all these new projects underway. And we look forward to talking to you in the quarter. Thank you. Bye-bye.

Operator

And this concludes today’s conference call. You may now disconnect.

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